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Tuesday, December 24, 2013

Singapore 2014 -Themes Pro-growth policy (DMG)

Singapore 2014 Themes
Pro-growth policy
We believe that there will be a shift away from the yield stocks in 2014. Last year, we were negative to neutral on most sectors, which seemed prescient considering the market’s flattish performance over the past year. We have since upgraded a few sectors including Consumer, Offshore & Marine, Plantation and Technology.

Correspondingly, our view on the overall market has turned positive.

On the property side, we still favour the REITs for now, but we do not expect it to outperform through the year. At some point, property developers should start to catch up, but it would not be too soon, as property prices will have to fall first. This should be evident in the first half of 2014.

How to play this theme: Look to invest in the cyclicals. In the consumer sector, we like OSIM and Eu Yan Sang. Our Offshore & Marine favourites include Sembcorp Marine and Ezion, while First Resources gets our vote for the Plantation sector. Property developers are expected to outperform the REITs in the later part of 2014, but it is still too early to start accumulating

It’s a “Small” world
2013 has been a year that investors would rather forget, particularly when it comes to small cap stocks. The infamous trio - Asiasons, Blumont and Liongold - killed off interest in the small caps in the final quarter of 2013. Some SGD8bn was wiped out from the stock market in the days after the SGX suspended the three stocks. Trading volume shrank considerably in the last two months of the year as investors were afraid of stepping onto another landmine. Not that we blame investors.

While some counters got their “just desserts’’, many others were punished unjustifiably. That said, the selldown has certainly opened up numerous opportunities. In the past, whenever the small caps bounced back, they tended to return in a very strong way. We believe this time will be no different. In terms of valuations, the small caps under our coverage are looking attractive - at a 9.1x FY14 P/E - on expectation of EPS growth of some 22%. This compares against the large caps’ 14x FY14 P/Es and EPS growth of 13%. If our positive view on the market is right, investor appetite for a higher risk asset class like small caps will go up a few notches.

Construction: A multi-year building boom
Singapore’s robust pipeline of infrastructure and rail projects will give rise to a multiyear boom for the local construction industry. Overall construction demand is projected to remain buoyant in 2014/15, with the Building and Construction Authority forecasting demand of SGD20-28bn per annum, backed by a strong pipeline from the public sector (SGD11-14bn per annum).

In the private sector, the key commercial projects include Mediapolis, Marina One @ Marina Bay, Duo@Rochor Road, Guocoland’s mixed development @ Peck Seah Road and Mapletree Business City - all of which will be rolled out over the next 2-3 years.

Under the Land Transport Master Plan 2013, the Government aims to expand its rail network. While construction of the MRT has always been awarded to big foreign players (such as McConnell Dowell), local listed companies also stand a chance of securing some parcels of work. One such company that has secured smaller work parcels along the MRT line construction is BBR Holdings (BUY, TP SGD0.35). Lian Beng Group (BUY, TP SGD0.70), an A1-grade contractor in general building, has a track record of securing a number of roadwork jobs from the Land Transport Authority.

Meanwhile construction-related companies (eg those that provide cranes or raw materials) that support the construction companies also stand to benefit. These include crane operators Tat Hong (NR), Tiong Woon Corp (NR) as well as Yongnam Holdings (NR), a supplier of steel structures for construction.

The combination of intense competition and the Government's restrictions on foreign labour will pressure margins in this sector. However, we gather from our recent discussions with construction companies that they are in a more comfortable position compared to a year ago when the restrictions were first imposed.

How to play this theme: We like main contractor Lian Beng Group and mechanical & electrical specialist King Wan Corp. There will be more in-depth coverage in this sector in the coming year. Watch this space!

S-chips: Catalysts are emerging
S-chips have been severely battered since 2008 following a series of corporate governance/accounting irregularity issues, and have yet to recover. The segment made an attempt to pick up in 2011, but before it could get back on its feet, it was hammered by problems surrounding China Hongxing and China Gaoxian, two prominent China-based companies.

We see a game changer that may turn sentiment around. The recent tie-up between the Singapore Exchange (SGX) and the China Securities Regulatory Commission (CSRC) may just be the catalyst to spark interest in this battered group of 140 stocks. SGX and CSRC announced that they will establish a direct listing framework for companies from China to list in Singapore. We think that this will boost confidence in future S-chips that are looking to list in Singapore.

On another front, China’s stock market - which partially drives sentiment in S-chips - is starting to look interesting after having underperformed the other major markets over the past six years. In Sept 2012, regulators imposed a moratorium while rules were being drafted to curb price manipulation. This move stalled close to 800 companies which had been ‘queuing up’ for a listing. Following China’s decision to end the 15-month freeze on lPO listings, there are expectations of a flood of new listings in 2014. There are also talks that there could be as much as USD11bn in share sales in the first half. As such, liquidity is expected to return in a big way in 2014.

Some of the sectors that we like among the S-chips are Consumer, Infrastructure and Environment. The first two sectors excited us in the past year, with our top picks being consumer play Sino Grandness (BUY, TP SGD0.88) and railway supplier Midas Holdings (BUY, TP SGD0.75). Sino Grandness has surged more than 3x since our upgrade in November 2012, becoming one of the market’s best performers. While Midas didn’t do as well, its > 20% stock price rally over the year was still respectable. We think there is more to come from both stocks going forward. As it is the Chinese Government’s key priority to clean up the environment, the prospects of companies in this sector are looking very bright indeed. Already, we have seen the stock price of SGX-listed China Environment (NR), a manufacturer of industrial waste gas equipment, surge more than 6x since its low in March 2013. We will be initiating coverage on this sector shortly.

All said, we would advise staying away from China property counters as a result of an explosion of upcoming IPOs in the mainland that is likely to soak up liquidity from the property market.

How to play this theme: Our S-chip favourites from 2013 should continue to perform well, with catalysts for both Sino Grandness (beverage unit gets approval to list in HK) and Midas (big railway orders). Environment plays will feature strongly in 2014 and will become the sector to watch for the next few years.

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